Sealed Air Corporation
Q2 2020 Earnings Call Transcript

Published: 8 Aug 2020

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Sealed Air Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that this call is being recorded. [Operator Instructions] I would now like to hand the call over to Lori Chaitman, Vice President, Investor Relations. Please go ahead.

[Lori Chaitman:]

Thank you, and good morning, everyone. I hope you and your family are healthy and staying safe. Before we begin our call today, I would like to note that we have provided a slide presentation to help guide our discussion. Please visit our newly reinvented website where today’s webcast and presentation can be downloaded from our IR website at sealedair.com. I would like to remind you that statements made during this call stating management’s outlook or predictions for future periods are forward-looking statements. These statements are based solely on information that is now available to us. We encourage you to review the information in the section entitled forward-looking statements in our earnings release and slide presentation, which applies to this call. Additionally, our future performance may differ due to a number of factors. Many of these factors are listed in our most recent annual report on Form 10-K and as revised and updated on our quarterly reports on Form 10-Q and current reports on Form 8-K, which you can also find on our website at sealedair.com or on the SEC’s website at sec.gov. We also discuss financial measures that do not conform to U.S. GAAP. You will find important information on our use of these measures and their reconciliation to U.S. GAAP in our earnings release. Included in the appendix of today’s presentation, you will find U.S. GAAP financial result that corresponds to the non-U.S. GAAP measures we reference throughout the presentation. Before I turn the call over to Ted, I wanted to let everyone know we filed our second quarter 10-Q this morning. As is our policy, the company does not comment on pending litigation, but we wanted to note that the U.S. attorney’s office has advised us that they have completed their investigation and will not be taking any action on the previously disclosed matter. I will now turn the call over to Ted Doheny, our President and CEO. Ted?

[Ted Doheny:]

Thank you, Lori, and thank all of you for joining our second quarter 2020 earnings call. I hope you and your families are staying healthy and safe during these unprecedented times. I want to reiterate what I said last quarter. How we overcome adversity defines us. And with the challenges we faced before, we are managing through this pandemic, learning from experience and becoming a stronger and better company. On today’s call, I will recap our second quarter results. I’ll share how we are navigating this crisis and creating growth in an uncertain environment. I’ll share how we continue to use the 4P’S of Reinvent SEE to drive our company transformation from how we innovate to how we solve our customers’ most critical packaging challenges. I’ll discuss how we see our company and markets evolving and how we are emerging from this crisis a stronger company. Jim will review our financial results in more detail, and we will end the call with Q&A. Let’s turn to Slide 3 for a recap of our second quarter results compared to last year. We increased adjusted EBITDA by 10% and expanded margin 220 basis points on constant dollar sales growth of 3%. Adjusted earnings per share was $0.76 compared to $0.80 in the second quarter of 2019. The $0.04 year-over-year decline was due to higher taxes. The increase in adjusted EBITDA resulted in an over $50 million of free cash flow growth in the first half of the year versus the same period a year ago. Our operating leverage clearly demonstrates our progress towards world-class. Despite adversity, we are driving our Reinvent SEE transformation faster. Our execution so far in 2020 and increased clarity of customer demand for our essential packaging solutions gives us confidence to reissue guidance for the full year. On Slide 4, the combination of our 4P’S of Reinvent SEE and purpose statement to protect, to solve critical packaging challenges and to leave our world better than we found it, has not only been our guide for company transformation. It has helped us to successfully navigate through the challenges of the pandemic. Our strategy to deliver the best products and systems at the right price and making them sustainable is working. We’re expanding our solutions with our customers by aggressively focusing on savings and faster paybacks for equipment, services and materials. Our broad and innovative portfolio, global scale and organizational agility has enabled us to respond to dramatic changes across our end markets and geographies. As the market moves to a touchless environment, we’re increasing investments in our automation and equipment portfolio. Our portfolio of automated packaging systems addresses customer needs and brings new innovative solutions to the market. We’re doing the same across our own manufacturing network to improve yields, productivity and our operating leverage. Sustainability is in everything we do, fueling our growth and in this pandemic, still top of mind. We continue to invest to meet our 2025 sustainability pledge and drive a circular economy for plastics. We are executing on this strategy through collaboration with industry pioneers, research and development and advanced technologies and implementation of new solutions. I’m excited to share that we recently made a $2.5 million equity investment in Plastic Energy Global. In addition, Sealed Air and Plastic Energy have formalized an agreement on joint R&D to further the recyclability of plastic waste. Plastic Energy is an industry-leading company in advanced recycling technology. The company’s technology enables the conversion of plastic waste into new raw materials that can be used in the production of recycled resins, which is an important step to achieve our 2025 sustainability pledge in a circular economy in plastics. This collaboration will help divert plastic waste from landfills and create a new recycling stream for plastics that have not traditionally been recyclable. Our One SEE operational excellence processes are driving flawless quality, productivity and yield improvements as well as customer service enhancements. You can see the structural changes of Reinvent SEE reflected in our first half operating leverage. Our performance continues to improve as we are progressing towards world-class. We are keeping people out of harm’s way and investing in our people while strengthening our business through the crisis. By operating as One SEE culture, we are maximizing productivity across regions, business segments and functions enabling fast, coordinated decision-making. As Lori mentioned, we recently launched our new website. Please look at our reinvented digital customer experience that showcases our resources with a greater focus on how our solutions approach integrates our equipment, systems, service and material offerings to help our customers improve productivity and keep their people safe. Concluding with our purpose

[Jim Sullivan:]

Thank you, Ted. Let’s turn to Slide 8 for a review of our net sales by region. In the second quarter, net sales totaled $1.15 billion, down 1% as reported and up 3% in constant dollars. In constant dollars, North America, our largest region representing 60% of our sales, increased 2% year-over-year. Asia Pacific was up 4% and EMEA was essentially flat. South America was up 18% due to U.S. dollar index pricing. On Slide 9, here, you see more detail on the organic sales volume and pricing trends by segment and region. In the second quarter, volume, excluding acquisitions, declined 4%, with a 2% decline in food and an 8% decline in protective. You may recall when we reported first quarter results early May, with many of our North American food processing customers experiencing labor challenges with the virus and industrial customers being mandated to shut down, we anticipated a mid-single-digit organic volume decline in food and a 15% to 20% organic volume decline in protective in the second quarter on a year-over-year basis. While our volumes were down in both segments year-over-year, the decline was not as severe as we originally thought it could be. North America and EMEA volumes were down 6% and 5%, respectively. Food volumes in North America were down 4%, while EMEA was up slightly. Continued strong demand trends for food retail solutions partially offset declines in food service and the impact from meat processing plant closures in North America. Protective volumes in North America and EMEA were down 10% and 14%, respectively. The industrial-related volume declines in these regions were also not as severe as we thought they could be, and e-commerce activity remains strong despite higher unemployment levels. Asia Pacific was our best-performing region in the quarter with volume growth of 3%. Protective was up 6% and food was up 2% in this region due to an increased demand for e-commerce, retail packaged proteins and higher exports of fresh red meat out of Australia and New Zealand. In South America, volumes declined 1%, with food up 1% and protective down 21% albeit off a small base. Protein exports remain strong, while local demand in the region has weakened. Net selling prices overall were modestly favorable in the quarter due to U.S. dollar index pricing in South America. On Slide 10, we present our year-over-year consolidated sales and adjusted EBITDA bridges for the second quarter and the first half of the year. Organic sales in the quarter declined just under 4%. Acquisitions contributed $73 million or 6%, which essentially all came from automated packaging systems. Currency translation negatively impacted sales in the quarter by $42 million or about 4%, mostly due to year-over-year declines in the Argentinian peso, Brazilian real, euro and Australian dollar. Adjusted EBITDA of $260 million increased $23 million or 10% compared to last year, with margin up 220 basis points to 22.6%. Reinvent SEE benefits totaled $38 million in the quarter, $34 million in operating cost savings and $4 million in price/cost spread improvements. Operating cost in the quarter included approximately $9 million of incremental spending related to COVID-19, but these expenses were mostly offset by lower employee travel activity. Adjusted EBITDA also benefited from a $14 million contribution from the Automated acquisition and $7 million of market-driven, lower input cost, which helped offset the adjusted EBITDA drag from lower sales volumes and currency translation. Adjusted EPS in the second quarter was $0.76 compared to $0.80 in the second quarter of 2019 due to higher taxes more than offsetting the increase in pretax earnings. The adjusted tax rate was 27.5% in the second quarter of 2020 compared to 19.4% in the second quarter of 2019. Last year’s lower tax rate was primarily due to the release of a valuation allowance in the quarter related to Reinvent SEE-driven profitability improvements in South America. So higher taxes this year negatively impacted our adjusted earnings per share in the quarter by $0.09. Turning to Slide 11. Here, we provide an update on Reinvent SEE, which continues to progress in earnest despite the pandemic and is driving significant structural operating leverage in the business. Our Reinvent commercial growth workstream is progressing well despite challenging macro conditions. We are accelerating innovations and executing on targeted growth areas, which is helping to alleviate pandemic-driven weakness in some end markets. We believe the commercial strategies, capabilities and governance processes developed from this new Reinvent workstream will help us drive future sustainable revenue growth in the markets we serve. In 2020, Reinvent SEE is on track to realize at least $110 million of year-over-year productivity benefits to adjusted EBITDA. We are continuing to prudently accelerate improvement actions where possible and have been successful to date since our operations have largely been intact despite ongoing challenges with the virus. Cash restructuring payments associated with Reinvent SEE were $44 million in the first half of the year and are expected to be about $100 million for the year. Turning to segment results on Slide 12, starting with food. In the second quarter, food sales of $673 million declined 5%. In constant dollars, sales were essentially flat. Adjusted EBITDA in food increased over $13 million or 9% to $169 million with margin improving 320 basis points to 25.1%. This performance was primarily driven by Reinvent SEE actions and favorable price cost spread. We are seeing increased demand globally for our Cryovac retail packaging, which ensures food safety and extends shelf life. We are also growing our sales pipeline for automated equipment solutions and are starting to see installations being scheduled again as customers utilize our new virtual capabilities to address labor productivity challenges and enhance employee safety protocols. With most of our North America customers now operating at close to normal production levels and global retail demand for packaged proteins remaining steady, we expect food volumes to improve sequentially in the third and fourth quarters and reach levels on par with last year in the back half of 2020. On Slide 13, we highlight results from our protective segment. In the second quarter, protective sales of $478 million were up $28 million or 6% as reported. Organic sales were down 9% with volumes down 8%. Adjusted EBITDA of $92 million increased $8 million or 9%, and the margin expanded 40 basis points year-over-year to 19.1%. Reinvent SEE benefits, contribution from the Automated acquisition and lower input costs more than offset the negative impact from the organic sales decline. It is worth noting, with targeted cost synergies implemented a year ahead of schedule, the adjusted EBITDA margin for the Automated business is now over 19%, on par with the segment average and approximately 500 basis points higher than when the acquisition was completed in August 2019. The protective organic volume decline of 8% in the second quarter was driven by a 20% decline in our specialty industrial portfolio, which includes Instapak and specialty foams. This decline was, to a large extent, driven by COVID-19 customer plant shutdowns throughout North America and Europe. The remainder of the protective product portfolio on an organic volume basis was essentially flat with growth in Bubble Wrap on-demand, Korrvu retention packaging and mailers, offset by declines in traditional void fill applications and shrink film. With strength in e-commerce and automation continuing in the second half and industrial slowly reopening, we expect organic sales volume in protective to improve sequentially in the third and fourth quarter but still be down year-over-year in the back half of 2020 in the mid-single-digit percentage area. Now let’s turn to free cash flow on Slide 14. In the first half of the year, we generated $129 million of free cash flow compared to $75 million in the same period in 2019. The $54 million year-over-year improvement was largely driven by higher adjusted EBITDA, partially offset by increased trade working capital investment. Trade working capital was a cash use of $100 million in the first six months of 2020, which is typical seasonality for the company. But the magnitude of the increase was higher this year due mostly to a purposeful inventory build for COVID-19 contingency planning, and this was partially offset by increased customer advance payments from new equipment orders. Overall, with strong first half results, improved demand visibility and significant trade working capital monetization in the back half of the year, we are raising our full year free cash flow guidance to a range of $350 million to $375 million. We expect free cash flow to adjusted EBITDA to increase from 33% in 2019 to around 36% in 2020. We are very well positioned to achieve our target free cash flow conversion ratio of greater than 40% in 2021, with the strong earnings progression of the business and as the restructuring investment on the Reinvent SEE transformation winds down over the next year. Slide 15 highlights our leverage, liquidity and debt maturity profile. We ended the quarter with pro forma net leverage at 3.4x, which is down from 3.6x at the end of 2019. Our priority is to continue to delever and we do expect our net leverage to come down further by the end of 2020. As a reminder, the leverage covenant in our credit facility has a maximum ratio of 4.5x at year-end 2020 and the covenant calculation at the end of the second quarter was 2.9x, which is lower than our reported pro forma net leverage ratio due to certain allowed favorable EBITDA adjustments in the credit agreement. So with significant cushion against our financial covenant, over $1.3 billion of liquidity and no debt maturities until August 2022, we have good financial flexibility. On Slide 16, we outlined our capital allocation strategy. We will continue to take a disciplined approach to strengthen our balance sheet while driving attractive returns on invested capital. We are investing in attractive markets and disruptive products and technologies and approximately 45% of our organic CapEx is focused on growth, including breakthrough production processes, innovation and automation. Maintenance and cost productivity projects comprise the remaining 40% and 15% of our organic CapEx, respectively. Regarding shareholder returns. For the time being, we are maintaining our dividend at current levels. And in the context of delivering on our overall deleveraging objective over the next several quarters, we do expect some opportunistic share repurchase activity. Turning to our 2020 outlook on Slide 17. We anticipate consolidated net sales to be approximately flat to down 1% as reported or $4.725 billion to $4.775 billion. On a constant dollar basis, net sales are expected to increase 1% to 2%, with food up approximately 1% and protective up approximately 3%. Acquisitions are expected to contribute over $170 million in sales for the year, of which approximately $165 million is from the Automated acquisition. We expect a negative impact from currency translation on sales of approximately $120 million for the year versus 2019. You may recall when we provided full year guidance back in February, currency translation headwinds on the top line were estimated to be $40 million. We are reinstating our guidance from February for adjusted EBITDA and adjusted EPS. For adjusted EBITDA, we expect to be in the range of $1.01 billion to $1.03 billion, which at the midpoint would equate to an adjusted EBITDA margin of approximately 21.5%. The negative currency translation impact on 2020 adjusted EBITDA is now estimated to be approximately $25 million. In February, unfavorable currency translation was expected to be only an $8 million drag on adjusted EBITDA. We expect adjusted EPS to be in the range of $2.85 to $2.95. Our outlook for adjusted EPS is based on approximately 156 million shares and does not assume share repurchases. The adjusted tax rate in 2020 is expected to be approximately 27%. As previously mentioned, we are raising our free cash flow guidance from approximately $350 million to a range of $350 million to $375 million, with CapEx in the range of $175 million to $190 million and Reinvent SEE payments of approximately $100 million. I’ll pass the call back to Ted now for closing remarks.

[Ted Doheny:]

Thanks, Jim. Before we open up the call for questions, I want to reiterate our vision, our strategy and how we’re using Reinvent SEE to make this happen. Our vision is to transform Sealed Air from the best in packaging to a world-class company servicing global packaging. I’m proud of how our people have embraced Reinvent SEE. We have executed well and have delivered solid first half results, considering a very challenging environment. Our Reinvent SEE transformation is well underway from how we innovate to how we solve our customers’ toughest challenges with the power of One SEE. I’m confident that our 4P’S of Reinvent SEE and our strategy to deliver the best products and systems at the right price and make them sustainable will drive profitable growth through this crisis and beyond. I want to, once again, thank all of our employees especially our location-dependent employees in our plants, innovation centers and field operations for their dedication and commitment to business continuity. Our people have been doing an incredible job through the crisis. Together, we will emerge from this crisis a better, stronger company. With that, I’ll now open up the call for questions. Operator, we’d like to be in the Q&A session.

[Operator:]

[Operator Instructions] Our first question comes from Ghansham Panjabi of Baird. Your line is open.

[Ghansham Panjabi:]

Hi guys, good morning and congrats on 2Q. Just in terms of the second quarter, would you be able to give us more color in terms of how volumes kind of shook out by month for each of the segments? And then also into July, there were so many disruptions during the quarter, et cetera. And then also specific to the 22.6% EBITDA margin that you recorded for 2Q, there was also a lot going on with price/cost being favorable, Reinvent SEE, and I would assume some of the temporary cost savings. So just based on that, how should we kind of think about margin progression for the back half of the year given that plastic resin is inflecting, and I would assume that some of those temporary cost savings will start to come back?

[Ted Doheny:]

Good. Thanks, Ghansham. We’ll probably break that up, and I’ll tag team that with Jim. I’ll first give you a little bit of color that you asked in the second quarter. And Jim, you can help me to make sure we get to second, third and fourth question. On what happened in the second quarter, it was quite interesting. It was dramatic actually in the quarter. Starting off in the quarter, we saw that surge that continued from the first quarter especially in the meat business and growing very, very strong. Then mid-quarter into April, we saw that changing dramatically with the shutdowns of the packaging plants. So we saw a surge then it slowed. And what we saw the shift going from food retail – to food retail from food service with the shutdowns of restaurants, what was going on with meat packaging. We saw it pick back up at the end of the quarter into June. So with the meat business, we saw that swinging pretty wildly in the quarter, but still, on the food service side, we see that slow in the business. On the protective side, we saw the pick – the industrial side really go way down with – and you’ve seen that with what’s going on with automotive, aerospace, the government shutdowns of businesses that we talked about in our prepared remarks. We saw the pickup on e-commerce really shifting in our – probably the biggest line up is on our mailers. A huge shift on e-commerce, we’re seeing the mailers up well over double digit and we’re seeing that globally. We saw that progress and actually pick up through the quarter. The industrial still was down through the quarter. We did see a little bit of strengthening as we’re starting to get markets opening up in the month of June, but still, industrial is down significantly. So both sides of the business, we had strong up and strong down. That’s why we went – if you look at Slide 6, where we gave you a lot of detail of what’s up and what’s down, that middle piece of an industrial, we’re still seeing that going in the second half to be slow. We’re still concerned with what’s going on with the COVID situation. We’re seeing industries open and then slow. So we’re watching that. So going into the second half, we’re still cautious of what’s going on with the markets. Shifting the portfolio, though, that’s the part we feel really good about, how quickly we’ve been able to move our product portfolio to attack those markets that are strong, again, being the e-commerce and the food retail side of the business. I’ll take a pause on that. Jim, if you want to talk about the margin question?

[Jim Sullivan:]

Sure. Ghansham, the margin assumption, if you look at our full year guidance at the midpoint, we do see margins coming down a little less than 100 basis points in the back half of the year. But importantly, year-over-year, we still see margin improvement. The reason for the back half of the year modest margin compression is really three things

[Ted Doheny:]

And just finally, Ghansham, to the third part of your question on the outlook. The only thing we didn’t talk about was what we’re seeing actually in the automation space, which is being driven in the equipment. In the second half, we saw – as Jim mentioned, we saw advance payments going up for equipment, but we saw actually the sales impact of our equipment in the second quarter down year-over-year across the portfolio. We’re still working with our customers in this COVID environment to getting people and getting technicians in place to take advantage of that equipment business that we do see strong and actually in our outlook. So that’s the part we’re cautious. Can we get into those facilities? Get the equipment, not only the orders that we already have, but we’re anticipating even further movement in the automation for us in the second half. So that’s a part we’re working closely with our customers in making that an opportunity for the second half. So operator, if we can get the next question please.

[Operator:]

Our next question comes from Anthony Pettinari of Citi. Your line is open.

[Anthony Pettinari:]

Hi, good morning. Ted, following up on the automation question. I think – is it possible to say how much the opportunity from a volume perspective in the second half of the year from food care automation? Or if you can give a sense for sort of addressable market size or what that opportunity may look like next year or beyond? And then when you talk about the delays in terms of getting on-site at the customers given COVID restrictions, is that something that’s getting resolved within a matter of weeks or a matter of months? Or if you could just give us some kind of color in terms of what kind of lag time you’re seeing in terms of getting on customer sites?

[Ted Doheny:]

Sure. Anthony, I’d like to answer it for the whole portfolio, not just food because we’re seeing the automation drive significant opportunities with the protective side especially on fulfillment. So framing it up, we’ve talked about equipment before. It’s less than 4% of our business today. Our plans are to significantly grow that. So what we saw in actually the second quarter, even the first half, we actually saw our equipment business down year-over-year due to the installations. So down a couple of percent because we couldn’t get that actually installed and get it invoiced. So if we look at the food business, and then I’ll talk about e-commerce, of how do we get that in, we have some major installs going in actually in Russia right now, a large part of our automation plans in place. So we’re having to work with the customers where we can get our people in place, also their people to get the equipment. And these are pretty large systems that we’re putting in. So we think we should be able to get that into the quarter into the second half, to your question. On the automation side, on e-commerce, we had some significant successes actually in the second quarter, getting the orders for some high-speed automation into the e-commerce. So basically taking our packaging and putting high-speed systems in place that we could package and get that – so we’ve got a couple of those actually installed, getting those up and running, so the pull-through on the materials. And we see that impact – probably, we’ll feel – see that the second half. We have more scheduled relative to the business. I would like to say that a couple of percent were down in the first half. I think I’d like to see a couple of percent up in the second half. But right now, that’s what we have in our guidance is to keep it flat because we have to fight through actually getting people into the installations to make that happen. Okay. Next question operator.

[Operator:]

Our next question comes from Phil Ng of Jefferies. Your line is open.

[John Dunigan:]

Hi. Ted, Jim, Lori. It’s actually John Dunigan on for Phil. Glad to hear you guys are all safe and well, and congrats on the strong quarter. I wanted to ask, the CapEx started the year at $200 million, and it came down to $175 million, but you’re protecting the growth CapEx side of that and now it’s back up to $175 million to $190 million. Can you discuss some of the moving pieces that you had in the guidance thus far? And then talk about where you’re seeing some of these continued opportunities for growth projects. Is it more on new innovative products or coming through in some of these internal automated equipment that you’re putting in place at their facilities?

[Ted Doheny:]

Yes. The first one, Jim can tag team if I miss something here. I’ll talk about what we’re spending our money on and what’s coming through for the investments. Originally, when we looked at what was going on with the crisis, we said, "Hey, let’s – we’re looking at liquidity." We said, "Hey, let’s see what we can do and to manage that CapEx." Going through the quarter and watching what’s happening with the business on CapEx for growth, as we highlighted on our capital allocation slide, we’re actually seeing, with the volumes moving up significantly, releasing capital. An example on that would be on the mailer business. Seeing the mailer business up well into the double-digit volumes just in the quarter, we’ve had capacity that we can move quickly on that investment. We have a new recycled content mailer. Actually, it was first led by Europe, but actually the volume is in the U.S. So releasing capital, that’s an example for that. Let it go in the quarter. The major capital, which would be large extrusion centers, we also had capital for that we’re releasing. And one of the product lines in our food side is our high-volume roll stock. Seeing that business shift very quickly in the quarter because that’s showing up in the retail, releasing some of that capital. That’s going to take some time but we’re responding to that market where we think not only do we gain share in the crisis, we’re going to hold it, get even more efficient and let that drive forward. So those are just some of the examples. So we’re giving the guidance that, hey, we thought we’re going to bring that down. No, we actually see capital opportunities that we can get growth from that. The second part of your question was the internal automation. We are seeing some great benefit in some of the automation that we’re putting into our major facilities, such as our largest food packaging plant in the world, which is in Simpsonville. We’re seeing some great success in our prototypes on the automation. So we’re releasing that capital and actually looking for that to go faster. So just some examples, both internally to drive automation but also externally to some of the market shifting in our portfolio to see if we can make that happen this year.

[Jim Sullivan:]

Ted, I just maybe would say a couple of things further to that is we really weren’t at all reducing growth. We really feel strong commitment to drive growth. We think there’s great opportunities to do that within our factories and also with customers, their equipment and that sort of thing. The hurdle rate is very high. We’re very disciplined about that rate. If you look at the 45% on growth, it’s higher than the historic allocation for the company. So we’re disciplined on how we’re going to do this, but we really don’t want to slow down the growth, the great projects. We do have some constraints within our facilities. Some suppliers don’t necessarily want to come into our facilities in a COVID environment. So we have to work through all of that. But we feel pretty good about where our cash is and where it’s going to be in the back half of the year. And it’s important for us to position the company for a strong future.

[Ted Doheny:]

Actually, just one follow-up on to Jim’s point, which was good there on the growth to maintenance. I think I mentioned that part of Reinvent probably a few quarters ago, that we have shifted that priority. We flipped it from 60-40 to driving a higher percentage on the growth that we had in the past. So we’re going to continue to work on that. Next question please.

[Operator:]

Our next question comes from Neel Kumar of Morgan Stanley. Your line is open.

[Neel Kumar:]

Hi, good morning. Thanks for taking my question. So your EBITDA guidance implies second half EBITDA of $507 million versus $513 million in the first half of the year. From a seasonal perspective in past years, it looks like you generally had stronger performance in the back half. I know you mentioned some higher input costs that you’re expecting in the second half but are there any reasons why you expect performance to lag at first half levels? Or is there some conservatism being applied to your guidance?

[Jim Sullivan:]

Well, certainly, in this environment, you want to be prudent and we think we are, but we did talk earlier about why the margin in the back half of the year at the midpoint of our guidance is coming down a bit. And you hit the nail on the head in terms of the inflation and the recovery on that with our formulas is a bit delayed. In addition, as I mentioned, we do have some growth-related spending that we’re going to be seeding in, in the back half of the year to drive the 2021 profile. So nothing we’re concerned about. Again, year-over-year, there’s still margin improvement in the back half of the year. And we do think they’re still beyond where we sit today, structural margin improvement opportunities into the future.

[Ted Doheny:]

Okay. Next question, please.

[Operator:]

Our next question comes from Adam Josephson of KeyBanc. Your line is open.

[Adam Josephson:]

Thanks, good morning, everyone, and congrats on a really good quarter. Jim, one more question about the margin issue. Can you just talk about what led to the 70 basis point – or excuse me, 80 basis point increase in your full year margin expectation? How much of that was temporary cost reductions versus something more permanent? And based on your full year margin guidance, you will have achieved about 300 basis points of margin expansion just in the past two years and it would be among the highest margins the company has ever earned. Is there a natural limit in your mind to the rate of margin expansion? And what are those additional levers that you’re thinking about beyond this year such that, I guess, you’re thinking the margins will expand further from that 21.5% range?

[Jim Sullivan:]

Okay. Let me take a crack at that. I do think that the margin expansion opportunity is there. The balance that we’re focused on is making sure that we’re taking the cash and the earnings associated with that improvement and reinvesting in the business to create kind of continual differentiated positions in our materials and equipment, et cetera. So we want to play long ball here. We’re not interested in trying to just hit a quarter or a year. We’re doing what we believe are very structural, sustainable improvements in our factories with Reinvent. We’re taking those same disciplines that we, I think, executed on very well to date and applying them to our commercial organization. We talked a bit about that. So yes, I think there’s great opportunity. But we’re going to have to balance as we go forward reinvesting in the business and driving those differentiated positions for the long-term. In terms of this year, clearly, we have some discretionary cost benefits that we’re helping in the COVID environment. We talked about lower travel and entertainment. When you have people sheltered in place and working remotely as many of our offices are, just the overall spend levels come down. That’s partially or mostly really offset by what we think over the long-term is going to fall away with COVID expenses. So in the first half, while we did have those savings, to a large extent, we put that back in for COVID. In the back half of the year, as I said, we’re releasing some of that discretionary spending to drive growth into the future.

[Ted Doheny:]

Yes. And Adam, I have to jump in. I know you addressed that to Jim, but he talked about where we’re going on our margins and the operating performance of the business. And I have to go back to our strategy and the vision of reinventing the company. We think the opportunity here is we’re just beginning our journey of what’s out there. The COVID crisis, as we’ve highlighted, is actually accelerating where we think we can take Reinvent. Lots of things happen in the quarter. You see the portfolio shifting extremely fast to the market. What you’re seeing is the power of this engine on leverage. Now the leverage doesn’t show up on growth because we had certain things way up or we had things down. But you’re seeing the power of this engine on driving the leverage on growth, and that’s what we’re going after. So more things to come. We got to drive the growth. But as far as the vision is we want to be world-class operating leverage, serving the packaging industry. So I appreciate your comments. You see good things. I’m just sharing for all of those listening, we haven’t gotten to where we want to go, but I appreciate the questions and the timing. And I think, operator, we have a chance for just one more call.

[Operator:]

Our last question comes from Brian Maguire of Goldman Sachs. Your line is open.

[Brian Maguire:]

Yes, thanks for squeezing me in. Congrats on a great quarter. Just a question on the capital reallocation. Wondering if you could comment on the overall M&A environment you’re seeing, if there’s any – there are a lot of different parts of the company that seem like they could benefit from things like APS has benefited you in the last year. Is that a priority? And with things settling down a little bit more in the macro, are you starting to reengage with those folks? And then sort of related to the Plastic Energy Global announcement. Do you think there’ll be more investments needed to try and improve the recycling infrastructure as you kind of work with your customers and partner with them to try and improve the recyclability of your products and reduce plastic waste?

[Ted Doheny:]

And Brian, you always – I like the way – you always ask the questions with the answers in your question. So you did it again. The only thing is it’s not a reallocation strategy. In the crisis, we’re driving our strategy. So that’s where we put the sheet in the earnings deck. This is a normal slide that Jim talked to that we normally don’t have in earnings. We use these investor presentations, but we want to be very clear what we’re thinking about, what we’re looking at. But what’s the exciting part is we see a lot of opportunities in the world that we’re living in right now, investing in the business, investing in our technology, investing in the innovations. As you highlighted, we signed this pledge to – the plastics pledge. So part of us investing in Plastic Energy – and a shout-out to the Alliance to End Plastic Waste, which I’m a member of. That’s how we found Plastic Energy. We’re committed to solve this issue. And we’re going to invest there, into that organization to help us close out that circularity. But the investments that we’ve – been made that really turned very quick is our internal investments on recycled content. Our Bubble Wrap product is now over 60% from recycled content. We have our Darfresh on tray. The trays are now up to 94% recycled content. And those are active investments that we have in place, that we’re going to attack that problem and fix it and actually turn the sustainability subject into a growth engine for us. The last thing I want to talk about is we even talked about mailers being up. Mailers are helping drive sustainability on carbon footprint. Significant savings in the e-commerce from – converting from boxes to mailers. We’re a part of that. We’re also seeing that come into food business, that famous question of paper versus plastic. Paper is not a good thing for a food processing plant. So we’re working to have a plastic solution but to have a sustainable, recycled solution in food. So your M&A part of that question, we’re always looking to see what the opportunities are, but being, as Jim even said on the share repurchase, we want to be opportunistic. And if we can’t develop it fast enough, we’re going to go and get help so we can go faster to drive our strategy. So with that, I want to thank everybody. Appreciate the comments on the quarter. I think it was solid. We got more good things to come. And with that, we look forward to seeing everybody – or seeing everybody virtually next quarter. Thank you, operator. That’s it for today.

[Operator:]

You’re welcome. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.